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Markets are often the best forecasters since theirdirection supposedly represents the collective wisdom
of the smartest people moving them - the
professionals, not the public that just goes along for
the ride where they're taken. The way the dominant
"players" view the future is how they decide where
they want to place their financial bets. Now,
however, the financial markets (stocks, bonds and
other money instruments) are in a tug-of-war with the
price of gold, which is typically seen as a safe haven
in times of uncertainty and in the past has moved
inversely with the price of equities. Since 2003,
when the Iraq war began, world equity markets have
soared and still are moving up strongly except in the
US where since 2004 they've gone up modestly. All are
stable or rising, however, seeming to be pointing to
good economic times ahead. The global bond markets
seem to concur as they've been surprisingly stable as
well and in the face of 14 consecutive interest rate
hikes by the US Federal Reserve. The equity markets
love wars because they're good for business - as long
as they go well. The markets always discount the
future about 6 months ahead, and today's valuations
represent that view - that all is well, profits will
keep rising and so will stock valuations.
GOLD'S AWAKENING FROM A 25 YEAR SLUMBER
If the equity and bond markets are right and the
future is rosy, why then is gold also soaring after a
25 year slumber following its decline after peaking at
$850 an ounce in 1980. Since early 2001 it's more
than doubled in price from around $250 an ounce to
around $550, and gold forecasting pundits fearlessly
predict much higher valuations ahead. Amazingly the
highest number I've seen is $5,000. Wow. Now that
forecaster surely must also be predicting some kind of
financial or other type Armageddon or worse.
fearless forecaster. And I'll admit straight up I'm
not sure what gold is telling us, but I have some
ideas. Read on, and I'll play a mug's game laying out
what I think, right or wrong. The best and brightest
in the financial world do it every day, and even when
they're wrong, often enough, clients pay dearly for
their advice. I'll give it to you free of charge, and
I may turn out to be smarter than they are, or maybe
just luckier in making a good call. But, as the
saying goes, you get what you pay for.
FACTORS AFFECTING GOLD PRICES
Ask a gold expert what factors affect gold prices and
you'll get some pretty standard answers, usually
right. Gold is a global thermometer that reflects
monetary, political and economic stability as well as
marketplace demand for the metal itself as jewelry,
investors' (including central bankers') desire to hold
it for any reason or a as hedge against the uncertain
value of fiat money, which is just paper currency from
a government printing press that can be produced in
any amount.
Governments, Wall Street and business around the world
hate it when gold prices rise because it usually
reflects an early warning of some kind of trouble
ahead, nearly always financial. It may be signaling
rising inflation or deflation as well as a general
lack of confidence in fiat or paper currency. When
the gold price rises sharply against a country's
currency, as it has in the US, it points to trouble
ahead for that country's economy and monetary policy.
At least it's worked that way in the past. What's
also worked is that when gold vies with an inflated
paper currency (because too much of it has been
printed), gold always wins. If investors lose faith
in a paper currency or just have enough uncertainty
about it, they usually turn to gold.
Just retired and now former US Federal Reserve
Chairman Alan Greenspan was very fond of the printing
press. He must have been since he used it liberally.
He doubled the money supply since 1991 and increased
it over 40% since 2001. Of course, being above all
else a consummate politician, he had to do it to
please his constituents (Wall Street and the big
banks) and especially to help George Bush and the
Congress spend like drunken politicians to fund an
expensive war with no end in Iraq and lots of others
on the drawing board. You need big bucks for that,
there's no end in sight, and the new Fed chairman will
probably be just as friendly to the warmakers and make
things even worse ultimately - that is, keep the
printing press active enough to pay the war profiteers
well and the economy moving ahead, for now at least.
Ben Bernacke, the new chairman, begins his tenure with
a nickname he may live to regret - "Helicopter Ben."
Now there's a dubious handle for a former
distinguished academic at Princeton and now Fed
chairman. He got it after his remark that he'd drop
dollars from a helicopter if that was needed to
stimulate the economy - meaning, of course, he'd keep
the printing press running "full out" if that's what
it took. Central bankers never run out of paper or
ink.
ARE THE PUNDITS MISSING THE REAL MESSAGE FROM THE GOLD
MARKET
I don't know, and they're a lot smarter than I am, but
I'll stick my neck out. World stability changed
direction after 9/11 when the Bush administration
declared war on the world - at least all parts of it
not subservient to US interests. The price of peace
with the US is "knowing who's boss" and being
respectful and obedient - just like organized crime
family members are to "The Godfather." But just as
mob bosses mete out punishment to disobedient
underlings, so too will be the fate of any nation
daring to go its own way, independent of US wishes.
It'll likely see some hostile action against it -
political, economic, military or all three.
The "fun and games" began for real against Afghanistan
a month after 9/11 and went into overdrive against
Iraq in March, 2003. Now the war drums are audible
against Iran, at the head of the target country queue,
with Venezuela and Syria likely next in line and other
choices to be named later to follow. Despite the
enormous cost (an economic boon at the outset and for
a while), the Bush administration declared a
"permanent state of war" and doesn't want to be
accused of running out of targets. To keep the war
economy going they'll always have another one at the
ready.
Looking back, the price for good times that were too
good or for reckless behavior that was too reckless
has always been the same - the day comes when you
"gotta pay the piper." That may not be this week or
next month, but I'll speculate that the sharply rising
gold price in the US is discounting more than the
usual financial rebalancing its price action usually
indicates. Ask any gold seer and they'll explain that
while geopolitical events may affect the price of
gold, they're never a major factor. I'll be contrarian
and speculate that along with whatever other message
the gold market is sending, it's also signaling
concern about the geopolitical threat to peace and
world stability, especially in the strategically
important Middle East. High oil prices may be sending
the same signal, although of late prices have
stabilized and come off a bit.
My best guess is that the rising gold price may be the
canary in the mine shaft warning of a growing and
dangerous change in world stability reflected in
investor sentiment. At times of growing economic or
geopolitical tension, uncertainty or danger, gold is
seen as a conservative asset or "safe haven" and a way
to preserve wealth as it always has been for the past
6,000 years. That's a track record even the Dow Jones
averages can't match.
There's a lot for investors to worry about now along
with the new war drums beating I'll discuss below.
There's the perceived threat of terrorist attacks, the
continued loss of civil liberties in the West and
especially in the US, the possible disruption of oil
supplies, and at some point that "piper" waiting to be
repaid for years of financial profligacy in the US to
fund all the "adventuresomeness" and excess stimulus
to keep the economy humming. And there's one other
factor affecting the US dollar. Many currency experts
believe the currency is in a long-term bear market
that began in 2002, even though it rebounded well last
year and is holding its own so far this year (a
cyclical rally in a longer term secular bear market
say the dollar bears). Some of the reasons given for
this trend are the emergence of the euro as a
competitor to the dollar in December, 2001 by the 12
European nations using it and the desire of other
nations to diversify into other currencies (as well as
gold). And its interesting that some Islamic nations
have begun doing some bilateral commerce in gold
dinars and China now has its first gold exchange. All
this signals a potential or maybe likely shift away
from the almighty dollar as the world's primary
reserve currency.
ANOTHER MIDDLE EAST WAR MAY BE ONE TOO MANY
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